While it is most true that Donald Trump has no real ideology, he just says what he thinks his base wants to hear, there is one notable exception. For thirty years he has harped on his belief that the US is getting screwed in our trade with other countries. Consequently when he starts trading tariff threats with China, I believe he is serious and that should scare the hell out of all of us. I’m ticked off right now because, while I am a careful investor and my investments are structured to survive any of Trumps antics, his tariff stupidity is affecting the stock market which is in turn decreasing my net worth. However, market moves are just early indicators of where investors think the US economy is going in the future.
Trump claims to have earned an Masters of Business Administration degree, but if he does he must have slept through his MBA economics classes and paid someone to take his tests. I have an MBA and I was a member of the national economics honor society and I can tell you with great certainty that that if he knew anything about macroeconomics he would never have said that “tariff wars are easy to win”. Both liberal and conservative economists almost unanimously preach the opposite, that no one wins a tariff war.
Now Trump probably thinks that he can win his current tariff battle with China because he believes the numbers on his side. To some extent that’s true. In 2017 we imported $505.6 Billon worth of goods from China while we exported only $130.4 Billion worth of American goods to the Chinese. That means that we had a net trade deficit with $375.2 Billion with that country. Trump, believing he is the best negotiator in the world, is trying to send a message to China’s President Xi Jinping with his tariffs, economic threats and tough talk. The message is, “Jinping, you had better sit down with me and negotiate a way to cut our trade deficit with your country. You sell us a lot more stuff than then we sell you, so you have a lot more to lose if a full-fledged trade war breaks out between our two countries”.
Unfortunately, though Trump sees the world in simple terms, our trade situation with China is very complicated. China also has some trump cards (pun not intended) in their hand and they are not timid about playing them aggressively. In my view, rather than forcing the Chinese to the negotiating table, it is likely that it will be Trump will have to fold his hand before the game is fully played out. The tariff timeline gives us a good indication that the Chinese are more than willing to play hard ball, which means they don’t plan to lose.
March 1st Trump announces his intention to impose a 25% tariff on all imported steel and 10% tariff on all imported aluminum.
March 8th Trump make Canada and Mexico exempt from the steel and aluminum tariffs and later grants exemptions to other allies leaving China in the cross-hairs. China isn’t too concerned because the US imports only 2% of our steel from China and only 10% aluminum.
March 20th Trump announces his intention to impose $60 billion in addition tariffs against Chinese products but doesn’t specifically identify which goods will be affected. China in turn warns of severe repercussions.
March 22nd China announces that it will not back down, “”China would fight to the end to defend its own legitimate interests with all necessary measures.
April 1st China imposes tariffs on 128 U.S. products, including a 25% tariff on pork and 15% on other items including agricultural products
April 3rd Trump administration unveils the list of Chinese products it will seek to hit with the $50 billion in tariffs which Trump previously announced previously targeting electronics, aerospace and machinery products.
April 4th: China retaliates and announces it will impose additional tariffs targeting 106 more U.S. products
April 5th: Trump retaliates announces he will wants to impose additional tariffs on $100 billion work of Chinese products.
In response to this economic saber rattling, since early March the stock market has lost many billions of dollars in value and I have personally lost (at least on paper) many tens of thousands of dollars in IRAs and other retirement accounts – I am afraid to calculate exactly how much. Trump says he is addressing the huge trade imbalance which the US has with China and unfair Chinese trading practices, but most economists, including Trump’s top economic advisor, Gary Cohn who resigned because his advice was being ignored on this issue, believe that a tariff war is exactly the wrong way to address these problems.
The biggest problem with Trump’s approach is that the primary cause of the huge Chinese trade imbalance is not that county’s economic policies. For the most part that imbalance exists because China has a huge work force and their people are willing to work for much less than the typical American worker. That alone makes products made in China much cheaper than comparable products made in the United States. That’s why US companies have shut down American factories only to open up new one Chinese to make the goods they sell in the US and around the world. US manufactures can compete with China’s cheap labor market. Nothing can be done to remedy that situation over the short term so our large trade deficient with China will continue well into the future regardless of what Trump does.
It’s obvious that Trump is attempting to use the threat of tariffs on Chinese products to drive Chinese President Xi Jinping to the negotiating table where he believes he can force the Chinese to dismantle what he believes are unfair trade practices and stop the theft of US intellectual property. Trump believes his plan will work because China has far more to lose than the US in a trade war because it exports far more to us than we import of its goods. That’s absolutely true, but China also has potent economic weapons of its own. If this trade war continues there will be no winners, both countries will take big economic losses, but the biggest loser will be the country that blinks first. The country which will not obtain its objectives will be the first one that loses its political will to continue the battle as it escalates, and that may well be the US. Here’s why:
While it obviously has more to lose in the long run, China appears to be much better prepared than the US to weather a prolonged trade war. China has a centralized, government controlled economy and it is sitting on a $3 Trillion cash surplus. It can use that surplus to provide subsidies to Chinese companies hurt by the trade war. With our national huge debt and its massive projected increases under Trump, we are in a much poorer position to say subsidize say soybean farmers in the Midwest when China imposes a heavy tariff on their product, dropping both the demand for soybeans and the price the soybean farmer can obtain for their products on the open market.
In addition, the fact that we buy much more from China than they do from us is a two edged sword. Yes, their producers have more to lose, but that also means that US consumers have more to lose as well. When a tariff is applied to a group of products, say umbrellas, the retail price of that group of products must also increase. If Trump applies a 25% tariff on Chinese umbrellas, the retail price of umbrellas must also increase by a similar amount. Think of all the products you buy with labels that read, “Made in China”; Trump’s tariffs could ultimately raise the prices of all of those products. That would result in a spike in inflation in our county at the same time that our companies a shedding jobs because they are selling fewer goods to China. China’s consumers will be hurt much less because the buy much less from us.
The Chinese also own almost $1.2 Trillion in US government debt which constantly comes up for renewal. If the Chinese decide to retaliate against Trump’s trade policies by refusing to continue to buy up new US government debt, our government will have to increase the interest rates paid on that debt in order to incentivize other parties to buy it. That in turn will also drive up inflation in this country, further penalizing the US consumer.
So the Chinese also have the ability to inflict a lot of pain on the US economy while somewhat mitigating the pain of their own people. What it comes down to is which leader, Trump or Xi Jinping, can politically withstand the political heat caused by the downturn of their economies the longest; the one that blinks first is the loser. Either Xi will be forced to the negotiating table to surrender to Trumps demands or Trump will be forced to back off of his tariffs. So it is a matter of sustained political will, a battle that Trump is ill equipped to win.
The Chinese have already been very savvy about how there are applying their new tariffs. So far they have slapped the majority of their new tariffs on US products, especially agricultural goods, which are grown and manufactured in states which where Trump did well in his presidential election. That was no accident.
Then consider the respective political positions of the Chinese and American leaders. Xi Jinping has been consolidating his political power and is on the verge of being named the Chinese leader for life. Xi, to a large extent controls the Chinese media and its messages to Chinese citizens. On the other hand Trump job approval numbers continue to hover around 40% and he faces mid-term elections in less than a year were his lack of popularity could cost his party control of one or both Houses of Congress. Except for Fox News and conservative talking heads which continue to spew Trump propaganda, the US media has been very critical of his recklessness in starting a tariff war. The only thing that Trump has going for him right now is a good economy which he inherited from President Obama, and if he ruins that with his stupid, impulsive scheme . . . Well, let’s just say it will be pretty clear to me who is going blink first.
Xi Jinping and his government have made it clear that they are going stand tall and match Trump blow for economic blow. They obviously believe that the political pressure on Trump will ultimately cause him fold or he will be booted from office so he will no longer be able to harass them. All they have to do is wait him out and let the political pressure in the US continue to build. Probably what will ultimately happen will be that the Chinese will ultimately toss Trump a bone and agree to a minor concession (which won’t matter in the long run) so both sides can save face, but nothing will really be solved. Both sides will then retreat to their respective corners to lick their economic wounds.
The real problem is Trump’s narcissistic belief that he has the talents to make the entire world bend to his wishes. I believe that as Trump has found many times since he moved into White House, he will again discover that he is not omnipotent and that he has more than met his match in Xi Jinping. The only question is how much economic damage will he cause in the meantime?